Be a Budget Venture Capitalist

June 20, 2014

  • Dancing candy mascots rip the face off IPO investors
  • How to invest in an IPO before it goes public (it’s really possible)
  • Iraq propels oil again; The 5 ponders unintended consequences from U.S. airstrikes
  • Gold rallies, but why aren’t the platinum group metals joining the party?
  • The Harvard endowment’s “Ivy envy”… second thoughts on a consumption tax… reader says “no” to “Yo”… and more!

 In this sophisticated electronic age, few traders work the floor of the New York Stock Exchange anymore. Which is just as well, lest you be accosted by characters like these…

Actual scene from the NYSE floor, March 26, 2014.

That was about three months ago, when the maker of the online game Candy Crush Saga went public and candy mascots took over the NYSE floor. The IPO price for King Digital Entertainment was $22.50 a share.

At no time since has it traded anywhere near that lofty level…

The media boo-birds were quick to react: “For some investors, the deal brought back memories of the Internet boom and bust in 1998-2001,” said Reuters. The IPO market was being brought “back to Earth.”

 “Why should this be described as a failure?” wrote Tim Worstall at Forbes, looking through the other side of the lens.

“King Digital managed to sell at $22.50, nearly 20% higher than what the market thinks is, a couple of days later, a fair price. King Digital, and any of the early investors, have got more money than we now collectively think they ought to have done. This is a success for King and those early investors.”

A splendid success, indeed. Which gets us to the main problem with IPOs.

  “Investors buy initial public offerings for one simple reason,” says Jonas Elmerraji of our trading desk. “They want to get in on a big idea at the ground floor.”

But as another member of our trading desk, Greg Guenthner, is fond of saying, “Buying an IPO doesn’t get you in on the ground floor. It gets you in on the top floor; you’re just hoping that the company keeps building more floors above you!”

Facebook’s ground floor was in Mark Zuckerberg’s dorm room at Harvard in 2004. Peter Thiel got in on the ground floor, with every $500 invested turning into $1 million by the time he cashed out in 2012 — after the IPO. Heh…

“The worst thing you can do is buy an IPO on Day 1,” says Jonas. “On a stock’s first trading day as a public company, prices are often more strongly swayed by those hopes, dreams and anxieties than the business itself.”

Jonas’ long-standing advice to his readers — and we’ve shared it here in The 5 — is to wait for the dust to settle on an IPO. Just sit on your hands for a few weeks or months. Then, if you pick your spots carefully, you can make out very nicely.

  “But there’s another way to make money on IPOs,” says Jonas. “Much more money, in fact.”

Jonas has uncovered a way to invest in some of the most lucrative companies out there before they go public. Maybe not at the earliest Peter Thiel stage, but still plenty early. “The day Facebook went public back in 2012,” says Jonas, “venture capital firm Accel Partners had already turned its $12.7 million investment into $12.48 billion — that’s nearly a 1,000-fold increase!”

Accel made out only half as well as Thiel, with every $500 becoming $500,000. You probably still wouldn’t turn up your nose at that, right?

Of course, such opportunities are usually available only to accredited investors — with a net worth of at least $1 million in the bank or an income of $200,000 a year.

And even accredited investors aren’t always wise to Silicon Valley’s ways. They can’t necessarily tell which company is the next Twitter and which is trash.

 “But what if I told you there is a way for you to get in on the next high-profile IPO play before the investing public?” asks Jonas. “What if you didn’t need to be wealthy or connected?

“Recently,” he explains, “a few savvy Silicon Valley venture capital pros started a firm that lets you play private companies and potentially make absurd profits when they go public.

“In short, they created a way for regular Americans like you and me to level Wall Street’s playing field and trounce the bankers.”

For once, the government did something right. Thanks to legislation called the Small Business Investment Incentive Act, you have a chance to invest alongside some of Silicon Valley’s wealthiest and most connected players as they look to multiply their money — and yours — a thousandfold.

You can get started as early as today… and potentially triple your money in another six months. For starters.

Jonas walks you through the numbers, how it all works and how you can invest when you check out his presentation, here.

 Stocks are lifting still higher on a quadruple-witching Friday.

These days occur four times a year; it’s expiration day for stock options, index options, stock futures and index futures. Strange things can happen, but as we write this morning, all’s quiet. Well, the blue chips are leading and the Nasdaq is lagging right now. But otherwise, it’s “just another day,” and the S&P is pushing further into record territory, at 1,963.

 Crude has vaulted back above the $107 level — the West Texas Intermediate variety, that is. Brent, the international standard, is pushing $115.

There’s no news from Iraq driving the increase; it may well be a case of no one wanting to be short crude going into a weekend when anything could happen in Iraq.

U.S. airstrikes, if and when they come, “would be very different from previous American air campaigns in Iraq,” writes Patrick Cockburn of the U.K. Independent, who’s covered the territory thoroughly over the decades.

“This time, the U.S. would be looking for vehicles carrying ISIS fighters or for fighters moving on foot. Airstrikes against them would be effective in breaking up ground attacks if these are directed by highly trained U.S. forward air controllers operating on the front line.”

But then what? “ISIS is an efficient, experienced and fanatical movement with a reputation for striking back at any enemy,” Cockburn writes.

For the moment, ISIS is preoccupied with killing Shia Muslims and carrying on the 1,354-year-old conflict we’ve long described. But “if its fighters start being killed by U.S. aircraft, it may not be long before it sends its suicide bombers against American targets, inside or outside the U.S., to exact revenge.”

There’s a comforting thought…

 Gold is holding onto most of the gains it racked up yesterday afternoon, when it pushed past $1,300.

At last check, the bid on the Midas metal was $1,316… and silver is only 8 cents away from $21.

But the platinum group metals are down. They’ve been rising and falling with every rumor from South Africa on the progress, or lack thereof, resolving a miner’s strike. Palladium, this year’s star performer, is down more than 2% this morning, to $818. In the last 10 days, it’s traded as high as $858 and as low as $809.

  Hey, whatever happened to “We are fortunate to have exceptional talent that delivers market-beating performance”?

That’s what James Rothenberg said only a month ago. He’s the chairman of Harvard Management, the firm that oversees the nation’s biggest university endowment.

At the time, we mentioned Harvard Management’s performance was flat for the year ending June 2012, while the S&P 500 eked out a 2% gain. And in the year ended June 2013, the endowment notched 11% gains, while the S&P jumped 18%.

Cue Bloomberg News this week: “After years of subpar results at Harvard Management Co., three high-level managers have exited the $32.7 billion endowment, and the university is searching for new leadership.”

Rothenberg says he and the board will consider both inside and outside candidates. He says nothing about what’s changed with “exceptional talent” in the last month.

Hmmm… Maybe “Ivy envy” is at work here. While Harvard’s endowment has posted average annual gains of 1.7% from 2008-2013, Yale has outperformed with 3.3%, Penn with 5.4% and Columbia with 6.8%.

 “So I thought after all the billions spent and lives lost (on all sides and in between), the end result was… democracy and freedom,” writes a reader from Malaysia.

“Never mind the nonexistent al-Qaida, the nonexistent WMD… it was democracy in the Middle East, setting a new hope, freedom and standard and… excuse me, I must rush to the washroom…

“And now you tell me that Obama wants Maliki, who was fairly elected and decided by the people, to be gone?

“I am confused. I thought the U.S. was all for elections and democracy? Please help me.”

The 5: Well, we should amend our remarks yesterday. Maliki’s party indeed won elections earlier this year. But they lost elections in 2010, and Washington imposed a “consensus” government that kept him in power. And the story of how he came to power in 2006 is its own sordid tale, complete with extensive U.S. involvement.

As it happens, your editor is reading Overthrow right now, Stephen Kinzer’s lively history of American-imposed regime change going all the way back to Hawaii in 1893. All I can think right now is Maliki better hope he doesn’t meet the fate of another Washington puppet who fell out of favor — Vietnam’s Ngo Dinh Diem.

  “Most European countries, Canada and others have instituted ‘value added’ taxes on consumption,” writes a reader pushing back at the “fair tax” advocate we heard from yesterday.

“I don’t believe many of them eliminated or reduced income and other taxes when they did this — not for long, anyway. Politicians everywhere are ALWAYS out to embezzle or extort every penny they can from the citizenry, usually for purposes that ultimately benefit themselves as much as or more than anyone else.

“Politicians are robbers by function, if not by definition; yet people make uber-heroes of many politicians just as they do of Mafia bosses. Why? And why do we let them get away with it?”

  “A lot has been written about the QE programs and the accumulation of the Fed’s $4.3 trillion,” one of our regulars checks in.

“One fear is that interest rates will rise. Normally, when rates rise, interest-bearing securities take a loss. Securities provide a coupon rate when issued, but in the secondary market where they are auctioned off, the face value is discounted, so the coupon rate provides a payment that is competitive to the market rate. As rates rise, the old bonds lose value.

“My question is as rates rise and the Fed’s $4.3 trillion load loses value (if they are not sold, there will be no recorded loss), is there any harm done to the rest of the world as that asset drops in value?”

The 5: Well, seeing as the Fed is leveraged something like 80-to-1 — far beyond any of the investment banks circa 2008 — that would render the Fed insolvent and incapable of managing the next financial crisis whenever it comes.

That’s when something we call the “financial Patriot Act” comes into the picture. We describe it with the able help of The Death of Money author Jim Rickards in the new issue of Apogee Advisory. Subscribers can expect to see their issue before day’s end. Nonsubscribers can join up here.

  “Dave, you old fuddy-duddy! I’m, sadly, right there with you,” a reader writes after we marveled yesterday at the $1 million in venture funding for a “messaging” app capable only of sending a message that says “Yo.”

“So I want to say good morning to my love?” he writes. “If I sent her a text that simply said, ‘Yo,’ I’d pay for that the rest of the weekend! Next thing is I’ll be wearing a flat-rimmed baseball cap, half-cocked at about 30 degrees, with shorts so baggy my tighty whities will be showing. Not a chance in hell I will be part of the 50,000 ‘Yo’ app users.

“Good lord, at least you ran some pictures of the tapirs! Always enjoy The 5. Have a great weekend!”

The 5: Just watch when the developer IPOs in another couple of years…

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast

P.S. Yes, just as we’ve done every day since Tuesday, we’re looking for 100 more “wildcatters” who’d like to double their money playing America’s shale oil boom in only 36 days.

That’s exactly what some of our readers did earlier this spring… so we know it can be done. Along with the 91% in 28 days they pulled off this week.

It’s for real. You can get started by the end of this month… and perhaps bag your own money-doubling play by early August. See for yourself, right at this link.

rspertzel

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